Friday, October 28, 2005

Africa’s grey market VoIP operators are coming out into the light as attitudes and legislation change. The emergence of a VoIP service providers sector could prove almost as significant for Africa as the earlier emergence of independent ISPs. Because beyond the mobile companies, it has been the entrepreneurial energy and lobbying of ISPs that has driven regulatory change in many countries. The emergence of the newly legalised VoIP service providers (or those who hover in a legal ’no-man’s land) will add further pressure for change. In this week’s issue we talk to one of this new breed of operators Joseph Tekeng of Icon in Cote d’Ivoire.
So who are these former grey market VoIP operators? Most are young (aged between 30-40), have a background in IT and are involved in some way in distribution or sales. Often they operate IT businesses (offering computers, networking and installation) as part of a broader portfolio of businesses. At the smaller end of the business, many are cyber-cafe owners who have sought to increase their income. Indeed, the main motivation for taking the legal risks associated with VoIP has been the desire to make money but also to meet an overwhelming demand for cheap voice calls.

The operators are becoming increasingly sophisticated as the business grows. In the early days, it was enough simply to sign up with a US or European-based provider but now a number are operating gateways on their own networks which requires a higher level of in-house skills.

These former grey market operators have been emerging with the end of the international monpoly in many countries or in response to the formal legalisation of VoIP. The list of countries where VoIP is operated fairly openly includes Senegal, Cote d’Ivoire, Angola, Tanzania and Nigeria. Places like Cameroon would have more VoIP if Camtel was capable of competently selling broadband and its SAT3 capacity. In places like Equatorial Guinea and Gabon it is much more difficult for operators to come out into the open.

The sceptics are inclined to believe that these operators are simply parasitic arbitragers and that they will disappear when the telco incumbent is able to resume its rightful place through rebalanced lower international pricing. However the critics have perhaps failed to understand the impact of IP networks on the shape of the business. IP networks – in contrast to traditional telco networks – are decentralising. They allow the intelligence in the network to be at the edge rather than the centre of the network. As a result, they encourage the growth of small service providers at the edge of the network and not just in VoIP services.

So how big is the VoIP sector? We estimate that the current large-scale local providers and international suppliers conservatively account for about 15 million minutes out of an annual 64.9 million minutes (source: Balancing Act Voice and Data Bandwidth Forecasts): in other words about 23% of the total market.

So what choices does an incumbent telco have faced with this competition? At present because the traffic is “illegal”, these operators have almost all used international gateways. However when the business is out in the open, there is nothing to stop incumbents wholesaling minutes to these operators and to start treating them as a retail channel. But this poses a major challenge for incumbents rebalancing their pricing structure: they will need to bring their wholesale prices down to 2-3 cents a minute.

Cameroonian Joseph Tekeng of Icon is a good example of this new breed of VoIP operators. Icon is offering VoIP solutions to both corporate and residential customers in Cote d’Ivoire and has plans to expand in other parts of West Africa. His operation exists in the legislative ’no-man’s land’ (vide juridique) that exists in the country. The international monopoly has been ended but the Government is currently in no shape to frame and pass a framework for voice operators. As Tekend told us:”Cote d’Ivoire telecom are not able to pursue us on this. It still has a monopoly on local calls but not on international.”

90% of Tekeng’s customers are call-shops in Abidjan and as Teken says:”Because of the political situation we have not been able to offer the service more widely.”Icon has contracts with two ISPs for connections. Customers get an ADSL line: FCFA38,000 a month fore 128K or FCFA65,000 for 256K. It sells to its call shop customers at 3 cents a minute for calls to places like the USA, Canada and Europe and offer per second billing. The call shops sell on these minutes at between 10-20 cents a minute. Its margin is between 15-25% depending on the type of customer:”We are trying to find ways to reduce our margin so that we can expand the number of customers we have.”

The call-shop customers take an internet connection from Icon and buy an internet gateway with a graphic user interface where they can buy pre-paid minutes from a minimum of 25 euros upwards. Currently it has about 200 customers but when it reaches between 300-400 customers Tekeng believes that it will be able to offer free calls to residential customers on the basis of a monthly fee of FCFA5,000 a month. It buys its international minutes from in Holland and Icon has set up its own domain to sell its minutes.

It has opened an office in Ghana and plans to expand there. It is offering its services to corporate and residential customers only at the moment as VoIP is still ’illegal’ there and therefore it will not sell to call-shops. And the price? 15-20% more than 3 cents a minute. It is looking at going into Burkina Faso on the same basis. Where there is little competition, it will increase its margins accordingly. It wants to be able to add security solutions like firewalls and anti-virus software to its offer.

It is also acting as local agent for Taiwanese router manufacturer iDraytek:”They have good routers that combine internet access, security and Quality of Service bandwidth management. We can give priority to VoIP calling using MPLS. We’re going to sell routers to companies that need an ’always-on’ internet connection.”